9100 Relief: It May Not Be Too Late After All

It is not uncommon for a tax
professional to fail to make a timely election for a
client. Depending on the particulars of the case, it may
be advisable for the professional immediately to contact a
malpractice carrier. Nevertheless, the Treasury
regulations offer a form of relief allowing a late
election, commonly known as "section 9100
relief." Two types of relief are offered by Regs.
Secs. 301.9100-1 through -3—automatic relief and
nonautomatic relief.

Regs.
Sec. 301.9100-2 Automatic Relief

Taxpayers may take advantage of
automatic relief by taking what the IRS calls
"corrective action." Corrective action includes
filing the election according to the particular election's
procedures. If the taxpayer must file the election along
with a tax return, corrective action includes filing the
original or amended tax return. Additionally, corrective
action includes ensuring that all other related filings
are consistent with the election, including filings from
other years.

The deadline for taking corrective
action under Regs. Sec. 301.9100-2 automatic relief is
either six months or 12 months, depending on the election
the taxpayer missed. The nine elections that receive a
12-month extension include those:

To use a tax year other than that required
under Sec. 444;

To use the last-in, first-out
inventory method under Sec. 472; and

To adjust basis on partnership
transfers and distributions under Sec. 754.

Other statutory and regulatory
elections are granted a six-month automatic extension to
take corrective action, as long as the election was due on
the date the return was due, including extensions.
However, if the election was due on the return's due date excluding extensions, the election is not
granted the automatic six-month extension.

To take advantage of both the
12-month and six-month automatic extensions, the taxpayer
must take corrective action within the deadline. However,
an important difference between the 12-month and six-month
extensions is whether the taxpayer had to timely file the
return. Taxpayers can take advantage of the automatic
six-month extension only if they timely filed the returns
for the year in question. There is no such requirement for
the 12-month extension.

Taxpayers taking advantage of
automatic relief should send any return, statement of
election, or other form that they must file to the same
address to which the taxpayer would have sent it if it
were timely filed. All documents filed as part of
corrective action should state that they are "filed
pursuant to §301.9100-2" across the top of the
document. The automatic extension does not require a
letter ruling or user fees.

Regs. Sec. 301.9100-3 Nonautomatic Relief

Nonautomatic relief applies only to
elections whose due dates are set by regulation, not by
statute, and is granted on a case-by-case basis.
Nonautomatic relief under Regs. Sec. 301.9100-3 will be
granted only when it can be shown that the taxpayer acted
reasonably and in good faith and that granting relief will
not prejudice the interests of the government.

The IRS deems the taxpayer to have
acted reasonably and in good faith if the taxpayer:

Requests relief before the IRS discovers the
taxpayer's failure to make the election;

Failed to make the election because of events beyond
the taxpayer's control;

Failed to make the
election because, after exercising reasonable diligence
(taking into account the taxpayer's experience and the
complexity of the return or issue), the taxpayer was
unaware of the necessity for the election;

Reasonably relied on the written
advice of the IRS; or

Reasonably relied on a qualified
tax professional, including a tax professional employed
by the taxpayer, and the tax professional failed to
make, or advise the taxpayer to make, the
election.

The IRS deems the taxpayer to have
acted unreasonably and not in good faith if the
taxpayer:

Seeks to alter a return
position for which an accuracy-related penalty has been or
could be imposed at the time the taxpayer requests relief
(taking into account any qualified amended return filed)
and the new position requires or permits a regulatory
election for which relief is requested;

Was
informed in all material respects of the required election
and related tax consequences but chose not to file the
election; or

Uses hindsight in requesting
relief.

One of the factors the IRS weighs in
determining whether granting relief will cause prejudice
to the government is whether it will result in a lower tax
liability for the taxpayer than if the taxpayer had timely
filed the election. If the election affects the tax
consequences of more than one taxpayer, prejudice is
determined by looking at the aggregate effect of relief on
the affected taxpayers' tax liability. The IRS takes the
time value of money into account when determining
prejudice.

Requesting nonautomatic relief under
Regs. Sec. 301.9100-3 does not suspend the statute of
limitation on assessment. Therefore, the IRS may condition
a grant of relief on the taxpayer's consenting to extend
the period for assessment for the year the taxpayer should
have made the election and any other years affected by the
election. Additionally, to receive nonautomatic relief,
taxpayers must waive all objections to a second
examination of the issues and corresponding adjustments
affected by the relief.

Requests for nonautomatic relief
must be accompanied by affidavits. The taxpayer, or his or
her representative, must submit an affidavit describing in
detail the events and circumstances surrounding the
failure to timely make the election and the failure's
discovery. If the taxpayer's reliance on professional
advice led to the failure, the affidavit needs to include
detailed information about the engagement and the
responsibilities of the professional and the extent of the
reliance.

The taxpayer must also include
affidavits from his or her tax return preparer and any
other individual who substantially participated in
preparing the return. If the taxpayer sought advice from
an accountant or tax attorney regarding the election, the
request for relief must include affidavits from these
individuals as well. Practitioners may be wary about
submitting the affidavits, particularly if the
practitioner's oversight was responsible for the failure
to make the election. The prudent practitioner should
consider notifying his or her malpractice carrier and
seeking advice from counsel before taking corrective
action under Regs. Sec. 301.9100-3.

Furthermore, all of the affidavits
submitted pursuant to a request for nonautomatic relief
must be accompanied by a declaration that states, under
penalties of perjury, that the facts in the request are
true to the best of the declarant's knowledge and belief
and that all the relevant facts are included. The person
making the affidavit must sign and date the declaration.

Requests for nonautomatic relief
must follow the procedures for requesting a private letter
ruling, including paying user fees. The procedures for
requesting a letter ruling generally are described in the
first revenue procedure of each year (e.g., Rev. Proc.
2014-1). The IRS customarily includes appendices designed
to assist practitioners to request a letter ruling,
including ones that describe the user fees, contain a
sample letter ruling request that practitioners can use as
a template, provide a checklist designed to assist
practitioners with ensuring that the letter ruling request
is complete, and list the addresses where the practitioner
or taxpayer should send the request.

By following relief procedures in
Regs. Secs. 301.9100-1 through -3, practitioners can often
remedy an omission of a timely election after its due
date.

Contributors

Valrie
Chambers is a professor of accounting at Texas
A&M University–Corpus Christi in Corpus Christi,
Texas. Seth
Kossman is a member of the Tax and Business
groups at Ober Kaler Grimes & Shriver PC in
Baltimore. Mr. Kossman is a member of the AICPA IRS
Advocacy & Relations Committee. For more
information about this column, contact Prof. Chambers
at valrie.chambers@gmail.com.

The winners of The Tax Adviser’s 2016 Best Article Award are Edward Schnee, CPA, Ph.D., and W. Eugene Seago, J.D., Ph.D., for their article, “Taxation of Worthless and Abandoned Partnership Interests.”

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